The big news for the week was BHP Billiton’s long-awaited takeover offer for rival Rio Tinto. BHP is the largest miner in the world and Rio is the third largest. BHP proposed offering three of its shares for every one Rio share. The Rio board rejected the all-share proposal as too low. Rio shares closed up 15% at $130.90 with BHP closing down at $42.47.
The deal highlights BHP’s desire to control long life assets and demonstrates the confidence within the mining industry about the global economy. Any bid would be protracted given the complexities involved. Given the strong outlook for commodities and the fact that BHP represents around 11% of the Australian index, BHP is commonly held as a core portfolio holding for long-term investors.
BHP Billiton said today a merger could extract $US3.7 billion ($4.09 billion) in synergies through shared infrastructure and the acceleration of output. The company envisages the full cost savings and synergies to be achieved seven years after a potential merger.
BHP added that it was "appropriate to make BHP Billiton and Rio Tinto shareholders aware of this proposal so that it can seek their support for discussions between the two companies".
BHP Billiton said it considers a merger with Rio Tinto as the "most logical and compelling consolidation opportunity for both companies". The major miner said a merger would allow for the "faster and more efficient development" of iron ore resources in the Pilbara region of Western Australia, and the optimisation of coal operations in New South Wales and Queensland. BHP Billiton and Rio Tinto are the two largest iron ore producers in the Pilbara.
BHP said a combined entity could have "greater ability and increased opportunities to develop the next generation of world-scale projects" in new geographies that have "high infrastructure and other costs". A merger also would create the world's largest producer of coking coal, thermal coal, copper and aluminium.